The Feds Squeeze FSAs

If you buy big jugs of Advil every December to hoover out your flexible spending account (FSA), find another vacuum. Effective Jan. 1, over-the-counter meds are no longer eligible for reimbursement.

Millions of workers happily stash pretax pay in FSAs, then use those untaxed bucks to pay medical and dental expenses not covered by insurance--think co-pays, deductibles, OTC meds, even contraceptives.

Hewitt Associates, an HR consulting outfit, found employees with FSA accounts typically save $250 to $400 annually in federal taxes. The only downside: You lose any money left in an FSA at year-end.

Now Uncle Sam needs big bucks to pay for health-care reform and wants to discourage pretax FSAs. In addition to no more reimbursement for OTC meds, there'll be a $2,500 limit on pretax FSA contributions, beginning in 2013.